Book Review: The Algebra of Wealth

Scott Galloway uses a unique style in his book The Algebra of Wealth: A Simple Formula for Financial Security.  Rather than offer generic advice to choose a career that pays well, Galloway takes the tone of someone telling you privately what he really thinks of various career options, for example.  He takes a similar approach to other topics as well.  Readers may not agree with all of his advice, but they can’t say his opinions weren’t clear.  

The book is divided into chapters on focus, good habits, and avoiding mistakes; choosing a career and developing skills; spending, saving, and budgeting; and investing.  The blunt commentary on choosing a career was the most interesting part of the book.  

For those concerned that this is some sort of math book, it isn’t.  The few formulas in the book are mostly not intended to be taken literally.  For example, “focus + (stoicism x time x diversification),” and “value = (future income + terminal value) x discount rate.”  That latter formula is vaguely close to a value formula, but is unlikely to be helpful to anyone who doesn’t already know the actual formula.

Career choice

Many writers have taken sides on whether to “follow your passion” in picking a career.  Galloway’s take is interesting.  “Don’t follow your passion, follow your talent.” “Passion careers suck,” and “work spoils passion.”  “Focus on mastery; passion will follow.”  I’ve certainly suspected that the reason I had passion for my career and the sports I’ve played is because I was good at them.

Because few entrepreneurial ventures succeed, working for a large organization “offers better risk-adjusted returns.”  “As a society, we romanticize entrepreneurship.” “The defining characteristic of an entrepreneur” is lacking “the skills needed to succeed in a large organization.”  Most entrepreneurs “did not start companies because they could, but because they had no other options.”

Jobs in the trades can be very lucrative, but “We have shamed an entire generation into believing a trades job means things didn’t work out for you.”  Pursuing a college or university degree isn’t the best option for everyone.

Loyalty

These days, employers offer little loyalty to their employees, “and that has made our loyalty to one another, as individuals, even more important.”  “Mike Bloomberg once said, ‘I have always had a policy: If it’s a friend and they get a promotion, I don’t bother to call them; I’ll see them sometime and make a joke about it.  If they get fired, I want to go out for dinner with them that night.  And I want to do it in a public place where everybody can see me.”

Savings Goals

“Ambitious savings goals … can backfire.”  Research shows “people set overambitious goals for savings in the future.”  “Set a goal for saving this month, and you are likely to be realistic and achieve your goal.  Set a goal for saving in six months, and you are likely to set an unrealistic goal and fail to meet it.”  I can’t say I found this to be true for me about saving money, but it’s definitely true for my exercise goals.

Financial planning

“Failing to consider inflation is a common but severe oversight in financial planning.”  Ignoring inflation entirely can be devastating, but assuming it will remain at some fixed low level is dangerous as well.

“You aren’t paying [financial advisers] for investment returns.  Over the long term, nobody beats the market.  And if someone does have the secret to above-market returns, they aren’t going to be sharing it with you for a fixed percentage.  You’re paying an adviser for planning, accountability, and confidence.”

Investing

Invest “in a half dozen low-cost, diversified exchange-traded funds (ETFs) that put the majority of your money in U.S. corporate stocks.”  This is solid advice, but 6 ETFs may be high these days.  There are many good solutions that use 1-3 ETFs.

Galloway’s take on the passive/active investing debate.  Once they get to $10,000 in long-term savings, he tells people to invest $8000 passively, and $2000 actively, and to invest anything past $10,000 passively.  The $2000 “is enough that when you lose, you’ll feel the pain, but it’s not so much that you’re putting your future economic security at unnecessary risk.”  The idea is to learn whether you’re cut out for active investing without risking too much.  Galloway recommends avoiding active funds.

Those who delve into stock picking need to look out for EBITDA.  “CEOs like to emphasize EBITDA [rather than actual profit figures] for the simple reason that it makes their business look more profitable.”  “There has been a trend toward even more aggressive metrics, especially among early stage companies, usually described as ‘adjusted EBITDA.’”  Galloway describes the justification for such metrics as “dubious.”

One short section gives one of the best explanations I’ve seen of what bonds are, why they exist, and what players are involved in bonds.

Options markets are “dominated by sophisticated professionals.”  “Retail investors buying individual [option] contracts are minnows who these big fish swallow up for easy profit.”

Conclusion

This book has interesting takes on a variety of important personal finance topics.  Some of it is specific to Americans (mainly tax matters), but the majority of the book is useful to Canadians as well.  Whether you agree or disagree with the opinions expressed, it will make you think.